Distribution Strategies - Intermediate inventory storage point strategies - Traditional warehousing

10 important questions on Distribution Strategies - Intermediate inventory storage point strategies - Traditional warehousing

Which two decisions need to be made with a traditional warehousing strategy?

  • Centralized versus decentralized management
  • Central versus local facilities

How does a traditional warehousing strategy look like with centralized management?

In a centralized system, decisions are made at a central location for the entire supply network. Typically, the objective is to minimize the total cost of the system subject to satisfying some service level requirements.

How does a traditional warehousing strategy look like with decentralized management?

In a decentralized system, each facility identifies its most effective strategy without considering the impact on the other facilities in the supply chain. Thus, a decentralized system leads to local optimization.
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What happens with safety stock with a central vs local facility?

The more centralized an operation is, the lower are the safety stock levels.

What happens with overhead costs with a central vs local facility?

Economies of scale suggest that operating a few large central warehouses leads to lower total overhead cost relative to operating many smaller warehouses.

What happens with economies of scale with a central vs local facility?

It is often much more expensive to operate many small manufacturing facilities than to operate a few large facilities with the same total capacity.

What happens with lead times with a central vs local facility?

Lead time to market often can be reduced if a large number of warehouses are located closer to market areas.

What happens with service with a central vs local facility?

Centralized warehousing enables the utilization of risk pooling, which means that more orders can be met with a lower total inventory level. On the other hand, shipping time from the warehouse to the retailer will be longer than in a decentralized system.

What happens with transportation costs with a central vs local facility?

As the number of warehouses increases, transportation costs between the production facilities and the warehouses also increase because the total distance traveled is greater and quantity discounts are less likely to apply.

What should be kept in mind when choosing between central or local facilities?

There are several degrees of local and centralized facilities. It is no either-or decisions.

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